Can a dot in the Mediterranean compete in trade with Europe's giants?

Europe is the market of the future for Cyprus. Turning toward Europe -- and to a lesser extent toward North America -- is not just a sentimental yearning for the highly Westernized island but rather a calculated move based on the maturing of Cypriot farming and manufacturing and economic patterns emerging both to the east and west.

Early in the post-1974 recovery, the Cypriot government oriented exports toward Arab markets. In the mid-1970s these were easier to penetrate than Europe and were just beginning to realize the tremendous boom in income from mushrooming oil prices.

In 1973, only 7.2 percent of Cypriot exports went to Arab countries. But by 1980, 48 percent were sent there, with Saudi Arabia the leading Arab market, followed by Syria, Lebanon, and Libya.

Nevertheless, government economists believe it is important that Cyprus boost exports to the area of greatest current imports. And that is the European Community. As it is, Cyprus imports most of its goods from the EC, with the United Kingdom the prime supplier, followed by Italy and West Germany. Although in dollars total exports to Europe trail those to Arab countries, links westward are to increase.

In 1972, Cyprus signed an association agreement with the EC and began the lengthy -- and trying -- process of mutual trade concessions. It is working toward a customs union with the EC by 1982.

This trend line brings up the question: Is it possible for the small island republic at the eastern end of the Mediterranean to compete with the giants of Europe in the Common Market?

"We believe that Cyprus is much more flexible than most European nations," Georgios Hadjianastassiou, the government planning director, says. "It is able to absorb technology developed elsewhere very quickly and has a highly educated labor force and an excellent geographical location. Since we are a country entirely dependent on exports for growth, we have to act very effectively. And I believe we will."

The enlargement of the EC by the accession of Greece this year is expected to help Cypriot trade interests, says the commerce minister, Constantinos Kittis. But Mr. Kittis believes that initially Cypriot exports (mainly farm output) will "face greater difficulties until Cyprus enters a customs union with the EC, because Greece is a traditional producer and exporter of similar produce."

After the customs union is in place, however, the gradual decrease of import duties on manufactured goods will actually open the way to more Cypriot products appearing in Greece -- a natural marketing development, given cultural and linguistic ties between Greece and Cyprus. Accession of Spain and Portugal, with their high agricultural output, could hurt Cyprus, however.

European nations, says planner Hadjianastassiou, have the technological edge over Cypurs, but "we believe we can advance faster. The manufacturing unit here is small and maneuverable, and our agricultural production is not as fragmented as in Greece.

The Middle East will always be important to Cyprus, but it will not be the future growth area, Mr. Hadjianastassiou says, for several reasons: the drive by Arab governments to become self-sufficient to protect their oil wealth; instability in the region; the "fly full, return empty" problem for cargo haulers that carry exports to the Middle East. For Cyprus, this means marketing finished products primarily in Europe and the socialist bloc and sending skilled Cypriot labor, management, and engineering expertise to the Arab world.

Though traditionally an agricultural country, manufacturing now accounts for 65 percent of total exports. Overseas sales of clothing head the list, followed by cement and footwear. Alcoholic beverages and paper products also have been selling well, although the former will face difficulties in the Common Market and cannot be expected to expand into the largely abstentious Arab world.

In the agricultural area, citrus, carobs, potatoes, vegetables, and table grapes continue to produce income from abroad. The export of iron pyrites, asbestos, and copper is also on the upswing.

For the future, Commerce Minister Kittis is working toward development of greater capital-intensive industries: a meat processing plant, expanded mining operations, fertilizer production, ceramic tiles, and glassware. Meanwhile, he is set on making Cyprus a "way station" between Europe and the Middle East. A new airport is in the works at Paphos. A modern container port at Limassol is exceeding capacity. And studies are being conducted into the feasibility of establishing a dry dock in Cyprus.

"We want to see Cyprus become an area where foreign concerns with know-how and capital marry their interests with the local people and create manufacturing units of a sufficient size to benefit both parties," Kittis says. "Thus we will see a great deal of shipping and airfreighting, more joint ventures, more warehousing operations, and greater user of our free-trade zones."